Securities Lawyers Blog
LPL Financial was recently fined $2 million and ordered to pay $820,000 in restitution, for violations pertaining to variable annuity exchanges. This settlement, which was reached with the Illinois Securities Department, resulted from LPL’s inadequate maintenance of books and records with regards to documenting 1035 exchanges. A 1035 Exchange is a tax-free exchange of an existing annuity contract for a new one. In order for the new contract to qualify as a Section 1035 Exchange, the policyholder must have exchanged his or her existing contract for an equivalent new contract. The annuitant or policyholder must also remain the same.
According to LPL’s BrokerCheck file, LPL “failed to enforce its supervisory system and procedures in connection with the documentation of certain salespersons’ variable annuity exchange activities.” LPL has indicated that it will seek to enhance its procedures relating to surrender charges that often result from variable annuity exchange transactions. This, LPL believes, would ensure accuracy in their books and records along with client disclosures.
The product at issue was variable annuities, which have been closely watched by regulators dues to the complexity of the product and high fee structures. Elderly investors have often been sold variable annuities, when they were entirely unsuitable, just so that brokers could earn increased commissions. Regulators have paid especially close attention to those advisors who have switched their clients from one variable annuity to another, just to enhance their commissions.